The bucks terminology
Each and every type of funding explained
If you are in a startup, you can’t help but thinking about money that will drive your idea further: funding money.
But what about the terminology? What does seed and vc mean? Can I have someone bootstrap my startup? Below you can learn everything about the most common types of funding from David Ehrenberg.
“I am always meeting young entrepreneurs who are in need of capital to support the early costs associated with starting a business. With so many funding options out there, raising funds can be a confusing, and somewhat overwhelming, exercise. Further complicating the issue, the type of funding you pursue will depend on the particular needs of your company, your company stage, and the specific milestones you hope to achieve.
That said, knowing the most common funding options gives you the foundation you need to develop your customized fundraising strategy. So here is a quick(ish) overview of the most common funding types for early-stage startups:
Okay, I realize this isn’t actually “fundraising,” but sometimes the best funding option is not to seek funding at all, but rather to cut corners wherever you can and work on building your company from your personal savings. Besides saving you money, bootstrapping also helps you to focus on execution and build traction without outside interference. It’s also a means for avoiding dilution and yielding larger profit margins.
#2: Equity Funding
Equity funding is an umbrella term that refers to any means of financing your company in which you receive money in exchange for issuing shares of your stock. There are multiple methods for raising equity capital, but, depending on how you raise this money, you could be giving up anywhere from 1-100% of your business. Equity rounds include:
- Seed. Seed financing, as the name implies, is the relatively small amount of money a business needs early on to get started. Usually businesses seeking a seed round are still in the concept stage and need just a small capital infusion to cover expenses until they can start earning revenue. Seed money can also be a helpful tool for attracting future money from bigger investors. Because seed capital is smaller and more of a high-risk investment, it generally will come from friends and family or smaller angel investors.
While borrowing from family and friends can be appealing since it’s less formal than borrowing from a professional investor, it also holds personal as well as professional risks. If you are going to go this route, make sure you formalize the process and are a transparent as possible about the risks of investment.
It can be easier to raise seed rounds from a smaller angel investor, as opposed to going for the brass ring of VC investment. With an angel investor, you will usually pay less of a premium in the amount of the stock or percentage of your company you give up because angel investors have other means of making money and may not be looking for as specific a level of return as venture capitalists might be.
There are downsides to working with angel investors. Often you will need to find multiple investors to give you the kind of capital you need (as opposed to working with just one VC); this can lead to “herding cat syndrome,” wherein you find yourself facing the challenge of managing multiple people and relationships. But, for seed money, your angel investors are still generally going to be a good first bet.”